Tax credit developers are increasingly turning to the Federal Housing Administration as they get set to ramp up long-dormant projects.
Last summer, the FHA made several major changes to the way it approaches tax-credit deals, eliminating some very onerous hurdles. For instance, in the past, 100 percent of a project’s equity had to be deposited in cash before the closing of the construction loan, which severely limited a tax credit investor’s cash flow and ultimately alienated tax-credit deals. Now, only 20 percent is required.
The long overdue change was applauded by the affordable housing industry but suffered from bad timing, coming as they did during the equity market’s freefall. But FHA lenders are now beginning to see the effects of the Tax Credit Assistance Program enacted through the American Recovery and Reinvestment Act.
Lancaster Pollard has a pipeline of 15 tax-credit deals looking at the Sec. 221(d)(4) new construction/substantial rehabilitation program, up from just four deals in process six months ago.
“Now that the we’re starting to see exchange funds become a little more formalized, and a queue developing of projects that believe they’re going to get exchange money, demand for 221(d)(4) is starting to pick up,” says Nick Gesue, a senior vice president at the Columbus, Ohio-based lender. “A lot of people are dusting off the deal that have been on the shelf for 18 months.”
The FHA will also soon release guidance providing examples of the 20 percent upfront requirement for equity pay-in to clarify that it is 20 percent of the equity required by the U.S. Department of Housing and Urban Development (HUD), not the entire tax-credit equity. And the FHA will also soon release regulations that would allow Historic Tax Credits and New Markets Tax Credits to use the same equity pay-in as low-income housing tax credits, according to the Mortgage Bankers Association.
For new construction capital, the FHA is still practically the only game in town. And the FHA is exploring ways to expand its booming pipeline by possibly raising its per-unit cost limits, a roadblock to building in many high-cost areas. The agency is even considering allowing development on brownfield sites, which it has historically prohibited.
Many affordable housing owners are also taking advantage of the FHA’s flagship refinancing program, Sec. 223(f). Lancaster Pollard has seen healthy demand for Sec. 223(f) refinancings of affordable housing properties without tax credits, such as Section 8 properties.
“The other options, like Fannie Mae or bank financing, are less readily available,” Gesue says. “And a benefit of HUD today is that it’s maintained its underwriting. Fannie Mae’s standards continue to evolve on a monthly basis, but HUD doesn’t do that—they’re exactly where they were years ago.”
The 223(f) program currently offers better rates and terms than government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. All-in rates for the program were at about 5.85 percent as of mid-June, about 40 basis points lower than what the GSEs were offering. For cash-out refis, the 223(f) program features 80 percent loan-to-value (LTV), and a 1.17x DSCR, a sharp contrast to the 70 percent LTV and 1.30 DSCR that many such executions are seeing under the GSEs. For cash-in refinances, the FHA will go up to 85 percent.